Welcome back to the rate of change with York Wealth Management.
As advisors to some of the wealthiest families in the country, the Ready Change is a podcast
designed to help you in the pursuit of building long-term wealth through the insights of some
of the brightest minds in asset management.
I'm your host Murdoch Gaddi and in today's broadcast of speaking with Dan Winter and
Rowan Grant, founders and portfolio managers at Arbor Capital.
Arbor Capital is an investment firm focused on venture capital and growth equity investing
within the SaaS and tech sector.
They work with family offices and high-net-wealth individuals who are seeking to invest long-term
patient capital in high-growth private businesses.
Dan and Rowan share their journeys from entrepreneurs to family offices and to the establishment
of the first fund in 2016, which at the time recording has achieved a gross investment
rate of return of above 30% and multiple undeployed capital of more than 4x.
For me, I enjoyed hearing how their journey has led to the evolution and the launch of
the new fund, how it's shaped their new structure, their investment philosophy, and what they're
looking for when investing and targeting private growth businesses.
If you're about to take off for the Australia Day long weekend or you're enjoying a couple
more weeks of fun in the sun, I hope you've had a great refreshing break and you're looking
forward to pursuing a prosperous new year with the team here at the rate of change.
With that being said, I hope you've enjoyed this conversation as much as I did, so sit
back, relax, and enjoy it.
Dan Winter and Rowan Grant, welcome to the Rate of Change with York Wealth Management.
Thanks for having us, Murdoch.
Hey, Murdoch, good to be here.
Why don't we pick things off by telling us a little bit about yourselves and how you
both got into financial markets.
Dan, why don't you start things off?
Sure.
Maybe I'll give you a bit of my background.
So I guess I studied international relations business at Bonn University on the Gold Coast
and during my time studying, I guess I realized pretty quickly that I had a passion for technology
and technology businesses.
So I actually teamed up with a friend of mine and we started to build our own technology
software.
It was a really interesting experience, taught me a lot about tech and business and ultimately
decided not to continue on with that venture.
And actually went off to pursue management consulting to try and broaden my perspective
and learn a bit more about big business and sort of how technology strategy, finance all
came together.
So quickly after graduating university, I went to management consultant for a firm called
Accenture.
I guess technically I was in technology and strategy consulting and did that for a few
years where I learned exactly what I sort of had intended to get out of that, a lot
about how big business operates, ASX listed companies and so on.
And toward the sort of end of a couple of years there, I went back to the drawing board
and I thought, what is the rest of my career?
And for me, it felt like the right thing to do was to look at investing in technology,
either becoming a founder again or to make a move into investment.
So basically at the end of that journey, I joined a family office and worked in a small
family office that was doing pre-seed and seed stage technology investing.
At the same time, I met Rowan and we actually started our first fund together.
So perhaps I'll pass to Rowan, he can tell you a bit about that and his background.
Thanks, Dan.
Yeah, Murdoch, I'm a recovering chartered accountant for my sins.
Started life in business advisory and taxation.
Didn't like it much.
It was good like fundamental knowledge base to have and reading and understanding financial
statements but couldn't see myself becoming a partner of the firm.
Did a complete 180 and started a tech startup in the music space, like a consumer facing
startup with no idea and no skills on how to do that, but learnt a lot.
And that was sort of my entree to the tech space.
And around the same time, I was getting mentored by CFO of a family office.
And after that startup failed, joined that office.
And that was sort of my then entree into private market investing.
Stayed there for a while, really, really enjoyed it.
And then had this really hard decision on whether to stick around and keep learning
and expanding my network or go back down the entrepreneurial path and start a fund.
And yeah, met Dan Winter around that time and decided, couldn't sort of put out the
fire of that internal sort of optimism of an entrepreneur and decided to leave the family
office and start a venture fund.
It's pretty interesting the journey we all have to get to where we are today.
It's not exactly a straight line, is it?
No, it almost sounds like a smooth narrative, but it never is.
The reason why I find that so interesting, you're saying Dan?
Yeah, I was going to say definitely not in the case of myself.
I thought I was going to end up working in the United Nations at one point and couldn't
have ended.
United Nations.
Yeah, I know this is a podcast about managed finance and investing.
But I need to know the story of United Nations in what sense?
No, no, it was more an ambition, perhaps a far-fetched ambition.
But at university, that was my interest.
So I wanted to work in politics or international affairs in some capacity and pretty quickly
realized that wasn't where I was going to land when my technology interest crept in.
So I couldn't be further from it now.
Don't worry, we all did it.
And university, I want to become an architect.
I was actually in the architecture faculty.
You should have met half my mates.
That were the Da Vinci's, the Michelangelo's.
And I realized pretty quick, smart, that I needed my cab license because I was nowhere
near as good.
But yeah, how interesting.
The other thing which we were discussing as well is what you guys do essentially, to my
understanding, is you service the clientele which you service are high-end family offices.
And do you guys want to talk a bit about, as you said with your upbringing, you guys
have actually worked for family offices.
So would you say that mentoring, working within these communities has given you essentially
the understanding of what wealthy families look for in particular investments?
Is that, and then essentially the managed fund is the vehicle about trying to put the
two together?
Do you want to talk a bit about that?
Is that correct or have I got that completely wrong?
I think you've done a good job of summarizing that actually.
So both Rowan and I come from family office background in some capacity.
Perhaps I'll talk a little bit about my experience there and then Rowan, you can talk about yours
as well because despite having a lot of overlap in our careers, we've got very different experiences
in terms of family office exposure.
But for me, it was very eye-opening because I joined a family office that was looking
at the earliest stage investing.
So we're talking like napkin stage concept ideation stage companies where you're dealing
with founders that have ideas and nothing else.
And it's a very uncertain environment, teaches you a lot about picking founders and what
to look for in people, I guess, more so than opportunities, but also how important it is
to have well thought out business ideas that are backed up by sustainable business models.
So I guess that part of the family office world, my early stage exposure is sort of
partially what led Rowan and I to building Arbor Capital, which is where we are today.
But then in addition to your point, like understanding how to manage money, learning sort of what's
important from a LP standpoint and limited partner standpoint, the backer of the fund
is very crucial to really getting a good grasp of what to think about when you're deploying
capital, the types of risks, the potential for returns and how you're going to generate
liquidity and so on.
So in my experience, it was super, I guess, relevant and contributed largely to where
I've landed today.
Yeah, I think it was a natural progression for us to target family offices as LPs given
we had worked previously in investing teams at family offices.
I think family offices are like eclectic beasts.
I think it probably doesn't look this way at the outside, but they're highly emotional
organizations when you think about it.
I was very surprised to understand and see firsthand, despite a solid investment strategy
and process written down, how often decisions or investments would be made based on emotion
and understanding that.
And that's natural.
That's life.
It's not necessarily a good or a bad thing.
But having that insight and seeing asset allocation exercises at a family office and then all
the way through to the deployment and security selection operations, I think it gave us a
good insight to talk the same language and to, when we're crafting our investment strategy,
we're using that well for family offices.
So it was a natural progression based on what we'd seen in our prior roles.
So that progression led to Arbor Capital.
So you have two funds, right?
You got the original and then you've got the new fund.
So why don't we, for Alice's segment that a bit, why don't we discuss the first fund,
how the family office style learning, you figured out what you're looking for and then
use that particular vehicle to invest, how the returns have been.
Do you want to give an overview of that first fund and then we'll stick into the second?
Sure.
So the first fund was a typical closed end limited partnership focused on early stage
technology investing.
So seed and series A primarily had a very specific mandate.
And it was fundamentally an extension of what Dan and I had been doing the previous few
years at the family office.
So it was a very defined mandate.
We would look at B2B software as a service marketplace style business models across a
sort of generalist approach from an industry perspective.
And that fund is, what was that, 2015 vintage, I believe.
So it's coming up on seven or eight years now.
It's a 10 year fund.
So it's hitting the tail end.
We've just started to have exits come through in the last few years.
I think our IRR, we've just had a couple of markdowns in this environment.
So it's dropped from, I think, what was 44% to around 30, low 30s.
MOIC is 5.7 from memory.
It's a highly concentrated, high conviction fund.
We typically took board seats and was as involved as we could be with the companies given time
constraints.
What were the returns?
What's been the returns for that fund?
Yes, MOIC was 5.7 IRRs sitting low 30s at the minute.
And how's the alignment and the fees work?
We took a pretty standard approach to fees.
We just did two and 20.
We didn't want to, well, we're pretty new, right?
So Dan and I were both in our 20s when we started that fund, which I think in some respects
was too young, but we were risk takers.
We were lucky to have experienced private market investing at family offices.
So there's a lot we didn't know, but in some sense, glad that we did that early because
we've still got a good chunk of our careers left and we've learned so much.
So it was a rolling that learning into this current fund as well.
So the businesses which you look, so which we invested in with that original fund, what
was the criteria like in order, what were you looking for?
Do you want to take that Dan?
Yeah, I'll take that one.
So back then we had a very specific mandate for early stage, well, SaaS technology businesses.
So quite a constrained mandate from the sense of not deploying broadly across categories,
but looking heavily at companies that were at that expansion growth stage.
So Series A and software oriented business models.
So pretty much every company that's in the portfolio that we had there is a software
based business model of some kind and has exposure across many different industries.
So I think we have one that's sort of fintech exposed.
We had one that was AI exposed, one that was logistics and one that was education.
So as Ron said, very highly concentrated portfolio there with exposure to software business models.
And then so these businesses, how did you find them?
When initially I think given that Ron and I both came from the family office backing,
we had fairly strong access to deal flow from many channels.
So you kind of when you're working in the industry for a while, you sort of build up
a natural direct inbound of founders that are looking to just have conversations with
venture investors who have been around the industry for a while, who actually have seen
many different opportunities.
So we had a large amount of just cold inbound come to us personally.
And I think second to that, the typical ways of getting out and meeting founders at events
and promoting the brand through content pieces would always generate additional opportunities
as well.
Probably the most common strategy, I guess, for founders to reach out, at least in terms
of some of the higher quality opportunities that we would have come across the decks were
related to founder introductions.
So these are founders that we'd already invested in or worked with in the past where they speak
about us as their investor to other founders in the ecosystem.
And those founders would then make the introduction and be like, okay, Dan, Ron, do you want
to come chat to this particular company?
That's always been a really strong source of deal flow.
So interesting.
And the other thing which we discussed many times before is when you were doing deals,
some of these transactions, you would take actually quite a large percentage of the business.
So and we discussed it with these quite like working with these founders led businesses.
So you know, how much equity stake would you look to take in these businesses?
And how would you go about helping improve those businesses?
You know, to your benefit and their benefit.
When we were doing our portfolio construction for the first fund, we had a target of around
10% ownership.
Now that that varied quite a lot.
And it depends on entry, entry stage two.
So we did a few pre seed investments where we own 20 or 25% of the business.
And then in some series A investments, we were owning 5%.
So your entry point can dictate that a lot.
But I mean, we won't go too deep into it, because it's a big topic, but the venture
returns and the power or dynamic and then you know, how big your portfolio is sort of
dictates, if you're going to have a any given opportunity, have the potential to return
the fund, you need to own, you know, a decent chunk of that.
So the theory goes, so we didn't have any hard and fast limits.
But I'd say around the end of the day, it was around a 10% ownership.
The reason why I was asking that is, you know, we've seen the past couple of couple of years
that this particular space take off, but if I'm understanding correctly, the majority
of the investments you made were essentially before, you know, that bell curve went incredibly
north.
So it was that was that luck that you managed to set your feet at the right time?
Or do we look into valuations?
And the deals were attractive at that particular time.
And then when I go, hi, we just don't want to touch this or you know, what was your mindset?
Good question.
It's a bit of both.
I've always Dan and I've been talking a lot about how the venture fund is started really
based on the timing of the principal's career, right?
As opposed to where you are in a market cycle.
And I think probably for better or for worse, and probably to be honest, for worse, the
LPs in funds are exposed to venture funds separate to the market cycle.
And not saying that you can predict that, but like we were, you know, mid to late 20s
and venture was just sort of, you know, coming out of GFC pretty, pretty quiet in Australia.
And we started at a fortuitous time when we just had then six, six years of just up and
to the right in valuations.
So that made us feel all very smart and special.
But if we're honest, there's a good chunk of luck in that.
On the analysis and decision making side, we are very price conscious around valuations.
So that means in the last three years, we sat on our hands a good chunk of the time.
We couldn't make sense of a lot of the valuations based on company growth rates and how big
we thought any given opportunity could be.
And comparing that to the valuation being proposed, we just couldn't see how we would
hit our target IRR, which is 25%.
And so we do a lot of rigorous modeling and analysis around that.
And it meant that every time we were doing our valuation analysis, not every time, but
like a good chunk of the time, we would either just bow out and say, guys, we can't, we don't
believe we can make the returns given this price, or we would submit a term sheet based
on the price that we were comfortable with, and we would get outbid by a large margin.
And I mean, like in many instances up to 300%, there would be a fintech opportunity that
we'd put at a 10 mil pre money at the seed stage and someone would come and pay 30.
And that shakes you a bit because you start to go, well, are we missing something?
Silly question, but I have to ask, like, did you ever look back at those cases when that
occurred and go, is this company still alive?
That's a very good question.
Rowan and I speak about this all the time.
Because to Rowan's point, sometimes we'd issue a term sheet and we'd be like, why have the
founders gone quiet?
Something's happening in the background here.
We can't quite figure out what's going on.
And then all of a sudden they'd come back and they'd be like, look, like we are actually
accepting this term sheet that's three times higher valuation than what you guys have proposed.
And we'd sit back and we'd just be like, this is ridiculous.
I can't believe someone's willing to pay that amount.
And it's interesting to your question, Murdoch, because on reflection, we actually do keep
a strong relationship with all of the founders that we get to term sheet stage.
And we often have looped back and tried to reconnect and explore opportunities to see
if there's another opportunity to invest because presumably the companies have grown and become
stronger, better companies and the market fundamentals have shifted in a way now where
perhaps those valuations are more realistic.
So actually early in the year, we started to do some of those reach outs to learn a
bit about how wrong we were or if we were correct.
And we had some interesting findings.
Some of those businesses were raising at flat rounds despite being two or three times larger
than what they were when we were looking at them initially.
So heaps of valuation, multiple compression happened between, I guess, when we were outbid
and when we'd revisited those opportunities.
So it is fascinating.
But I think Ron mentioned it earlier.
I think the cycle of venture can be, I guess, a good thing working in the favor of everyone
or it can be a bad thing.
And I think at that particular point in time, three or four years ago, valuations were just
out of control.
So there was so much room for correction and multiple contraction, which I think has definitely
started to unfold now.
At least what we've seen in the market is that valuations are looking much more reasonable
and a lot of these companies are actually still alive and succeeding.
However, the valuations now look a lot better.
Yeah, it's always good to talk.
Don't use television shows when you're talking finance, but I always love that show, Silicon
Valley, right?
Hilarious.
And there was a particular scene at a party when the guy's throwing a massive party and
it's like, what's this for, we've raised half a billion dollars with this than the other.
And then two years later, he sees a guy in a bar and he's just like, mate, what are you
doing here?
It's like 11 o'clock on a Monday.
And the guy turns away and he goes, I'll give you one bit of advice.
No one ever said, you know, you can take less money.
Yeah.
And everyone just looks at each other and just goes, wait, you can take less?
He goes, yeah, no one ever said you could take less.
Because what happens is the more you take, the more expectations grow, the more you have
to grow, the faster you have to grow.
And it's fine if you hit the first hurdle, everyone's happy, but you know, then it's
a bigger hurdle.
So then he's practically hammered.
He's like, best advice I can give you since you're doing a deal, you can take less, take
less.
I thought that was the best bit of television advice I've ever heard.
But no one ever discusses that because everyone gets paid from doing all the deals and it
all gets exciting.
Yeah.
It's funny.
But no, good, good digression.
Big, best series of best tech oriented series of all time.
I think that's so legendary.
But it's a good point that you make because it's actually, I mean, some of the shifts
that we've seen in the market over the last 12 months, really positive in that sense,
starting to see founders think a lot more about, you know, how do we do more with the
money that we have or that we're going to raise?
They're a lot more conservative with their projections, with their thinking around capital
injection coming into the company.
So that's had, I think there's very positive flow on effects from a lot of the macro environment,
I guess, complexities that we've had over the last 12 to 24 months.
And it's really forcing founders and investors to go back to the table and rethink some of
these growth models and some of these business models.
And, you know, how do you actually sustain a business long term?
How do you make a business that doesn't need to raise capital?
It's good to see that conversation coming back into the picture.
And definitely something that Rowan and I have thought about a lot with the new fund
is looking at those opportunities to sort of ride the wave of that corrected logic in
the market, which is good.
Well, this is a great segue after everything into the second front, right?
We've learned, we've made money, we've prospered, things have gone wrong.
So I would love to hear what is the new fund?
Why has it been started now?
I think we're discussing as well.
There's what three different tiers of investments.
You look at all the thinking of the investments.
So if you want to give everyone maybe let's begin with how is it structured?
Why is it structured that way?
What are you looking for?
And then how you tier the investments?
Maybe I'll do the high level and then pass to Rowan.
I think this one will have to split because there's a lot to unpack here.
So at a very high level, Arbor Capital, our new fund, is an investment firm that's focused
on venture capital and growth equity investing in technology companies globally.
I guess the tagline for the fund or the tagline that Rowan and I pitch when we talk about
the fund to founders is that we provide patient capital for high growth private technology
companies.
And there's a lot to unpack about how we got to that point and I guess how we came to the
foundations of the fund.
But initially a lot of our thinking stemmed from the fact that Rowan and I were both very
passionate long-term thinkers and we wanted to align that personal mode of operations
with I guess our strong conviction that patient capital being deployed into private technology
opportunities could deliver superior returns long-term.
And so those concepts of patience, long-term thinking, long-term investing, compounding
capital and private high growth technology companies were sort of key to the foundations
and establishment of Arbor Capital, which is the current fund that we're working on
and raising.
And I think there were so many learnings that we had from our first fund that led to some
of the more technical elements of the development that perhaps Rowan can touch on just around
how we structured it, why we structured it that way and how we landed on the strategy
that we have today.
Yeah, so those principles of long-term thinking and patience manifested into two material
changes to I guess the investment strategy and the structure comparing the last fund
to this one.
On the investment strategy side, it meant that we broadened our scope a little bit to
not just pure play venture opportunities, but private companies that were still high
growth, but they weren't on that venture trajectory of orders of magnitude, like multiple returns
and that a company that could be 20% or 30% KGAR growth that might be bootstrapped is
still an attractive opportunity, but falls outside the mandate of a lot of those traditional
funds.
And we were seeing a lot of these opportunities and were restricted in our prior mandate from
taking a look at them.
So they'd come across the table, Dan and I'd be like, fuck, this is an interesting business.
Wish we could dig deeper and take a look, but it's just not in the mandate.
So we'd take a pass.
And we'd always spoken like one day we'd love to be able to include these types of
bootstrapped and non-venture scale businesses in our strategy.
So this fund was an opportunity to do that.
So we now look at businesses that have been bootstrapped.
We now look at secondary transactions, whether that's allowing founders to de-risk their
personal lives and take some money off the table or buying off other existing investors
and sort of everything between that spectrum.
So we've broadened that scope.
It's still high growth private technology companies, but not just C series A venture
scale opportunities.
So that's the investment strategy and how it's different.
The other quite meaningful change was to the fund structure itself.
We did a lot of reflection and deep thinking around why funds tend to be these 10 year
life closed end vehicles.
What's driving that fund life?
Summer seven, summer 10 plus two, these closed end structures.
And Dan and I had had a series of conversations with probably older, more experienced investors
around liquidity and time horizons and things like that.
Some principle that we'd taken away was that having an arbitrary end life to your fund
may not marry up with the natural exit point of any given company in your portfolio.
And I think there's some funds in market today that have 2012 vintage that are probably coming
to wind up stage now.
And I know some of their portfolio companies aren't ready to either list or trade sale
and having to have conversations with their LPs about extending the fund or doing secondary
transactions.
And we just thought we would prefer to hold a position in our fund until it's the right
time to sell.
That could be three years.
It could be to be extreme 30.
If you hold a successful company that's compounding capital at high rates, we would like to hold
that company until it's the right time to sell.
So we ended up shifting away from closed end fund structure to effectively an evergreen
or permanent capital structure where we can open the books periodically to take more capital
in.
That's also probably a topic for another day, but it provides us the ability to give liquidity
to our investors periodically.
But probably most importantly, it allows us to make the decision of when to liquidate
a position at the right time for us and the company, not when the fund ends in two years
time, for example.
Yeah, that's quite frustrating and challenging because as you said, the first fund, what,
it's seven years in, you literally have three years and then what's going to happen to the
businesses?
Or can you potentially structure in a way if those businesses are going quite well,
your second fund can essentially acquire the interest in the other fund or does everything
kind of have to be dispersed?
Yeah, there's a few things that happen at the end of a fund life.
One is that you baked in your LPA, your limited partner agreement, you have an option to extend.
So 10 plus two plus two is reasonably common.
You can sell your position on the secondary market.
You can roll it into another fund.
And yeah, there's a plethora of options, but I think what didn't make sense to us was just
having this arbitrary end date, like maybe 10 years is a good amount, maybe it's not,
but wouldn't you rather hold the company until the right time?
It just sounds clunky and unnecessary.
It sounds like the people that are making money out of that are the lawyers and the
accountants.
Yeah, true.
We very much just thought about it as like, the best time to exit a particular holding
or a particular company will vary so much company to company and it has no bearing or
no relationship to how old our fund is and also how much we need liquidity in some sense.
The best time to exit a company will be when the best time to exit that particular company
is, and no other factor should determine that.
So when we were thinking about fund design, to Roland's point, it was critical for us
that the structure allowed for us to hold positions as long as we need to generate optimal
returns.
And, you know, I say to generate optimal returns because we might also realize that an asset
is no longer going to grow at the rate that we need it to and then that is the time to
exit that specific position.
So it's not necessarily that all assets would be held forever, but more that we do thoroughly
our analysis to work out when the right time was to exit a particular holding.
Well, it makes our lives a lot easier, especially when we're speaking with clients.
One of the main topics we found in the offices and wealthy families these days is how do
you transition wealth, the transfer, the intergenerational transfer.
And then what you learn and you understand is that these founders, wouldn't you agree,
these founders, they're the ones that have the vision, build something up, but it's a
lot to take for the second, you know, generational or third generation to be forced into being,
you know, I don't know, a baker, candle smith maker when essentially under there a musician,
right?
You know, what do they know?
But, you know, in saying that as well, they shouldn't be robbed of potentially a great
business that's generating a 30% cashflow every single year because it's a great product.
Yes, they don't want to have a bar of it, but you know, that cashflow is quite important
and it's doing the right thing.
So here's a question.
Do you think potentially the closed ended funds is a main reason why there's such a,
you know, push for transactions in these businesses or do you think if the main structure was
like similar to the structure, which is setting up for the second fund, there wouldn't be
this need to look for exits as much?
I'm just thinking behavioral psychology.
And the reason why I'm going with this is kind of like when the American system kicked
things off, as in they'll go in and you'll get a three year contract, got the contract
hit, so got the company hit all their incentive schemes get paid, but they just cannibalize
the entire next three, five years of the in order to achieve everything today.
And then, you know, it looks great on the stocks right now, but then the next 10 years,
the life of the company is horrendous.
Do you think there's a changing culture now?
I don't know.
That's a good question.
Like I know there's a few funds that have breakout companies like Canva in there at
the moment.
And I think from what I understand, those LPs have been happy to extend the fund lives
because you know, there will be, there's been a lot of paper value creation on Canva and
that will materialize into liquidity at some point.
So I think if you're sitting there as an LP in one of those funds that holds Canva, you're
probably happy to wait.
On the flip side, if you've got a company that's not performing so well, there's value
there, but the line of sight to liquidity is less clear.
You might be sitting there going, well, we can, what are we holding on for?
Like, are we actually, is our capital tied up here to produce more returns or is it tied
up here on a, on a hope that things will get better?
So yeah, it's a good question.
I'm not sure.
So from memory, the average life cycle of day zero to IPO of a company is 10 years in
Australia, I think.
So maybe it's something to do with, you know, on average liquidity should happen in 10 years
in a company.
And maybe that's where the sort of 10 year fund life came from, but I'm not sure.
Well, we'll dig into that, you know, another day, but let's get to the fun stuff.
What are, what opportunities are you seeing in the market?
And why I'm really interested in this, God has been a roller coaster, you know, free
money being poured, poured in on the macro, you know, during COVID times, then they go,
oh, it's too much.
You know, let's pour water over this fire, starve everyone, everyone's pivoting.
And then we're in this interesting time where, I don't know, the conversations we're having
is there's a lot of companies out there that want money, need money.
And it's a great, potentially hypothetically, a great time to invest.
But a lot of families, they're a bit gun shy.
It's probably the nicest way to do it.
And not necessarily gun shy, they're looking at other alternative assets such as, you know,
commercial property, you know, private lending's paying 15%.
It's more, you know, risk reward.
Right.
So, you know, how are you finding the sentiment out there for the asset class, which you guys
currently cover?
And what opportunities are you currently seeing?
I think there's probably two questions in there.
So, the first one is like sentiment, I guess, from the families and the LPs behind each
of the funds that are being raised at the moment.
And then the second one is like one of the actual opportunities that we're seeing in
the market to deploy capital.
And I think maybe I'll touch on the second one and Rowan, you could touch a little bit
on the first part of that.
So on the LPs.
In terms of the technology opportunities, I think we're seeing a range of different
things come through now.
We're starting to see companies that are falling out of the scope of VC because they've been
backed by VC dollars in the past.
However, they're not high enough growth rates anymore to sustain VC reinvestment.
So there's a lot of those type companies coming through that are like, well, actually, you
know, if we're not going to be on that 100X journey anymore, what do we do?
How do we raise money?
How do we actually flip this business, make it sustainable?
Make it more interesting to a wider range of investors or actually turn it to profitability?
Starting to see a lot of founders have those sorts of discussions with their investor base
and also within their boards, which is interesting in generating a whole new type of deal flow
and opportunity.
I think we're seeing a lot more founders in the early stage actually start to think about,
you know, how do I build a business that doesn't require funding?
Or is there a way to reduce or limit the amount of funding that I need over the overall journey
so that I don't find myself having to raise, you know, enormous amounts of capital and
have huge preferential stacks above all the ordinary shareholders, which is also a theme
that's been talked about a lot at the moment.
Just for those that aren't across it there, that's how the preference stack of capital
impacts the ordinary shareholders and most often the ordinary shareholders will be the
employees and founders of the businesses themselves.
There's a lot of, I guess, talk around some of those concepts.
And then more broadly, I think we're seeing a lot of just well-priced great founders building
good businesses that are just coming through looking for great strategic partners long
term.
So I think that's been an exciting trend as well in terms of the LPs, maybe Rowan, you
can cover, I guess, the appetite side of things like with the capital flowing into venture
funds.
Yeah.
So I'd say in the last year, so we've had a lot of conversations with both existing
and prospective LPs, predominantly family offices over the last 12 months.
And there's been probably since that Silicon Valley Bank, the regional banking crisis in
the US since that early March, there's been a lot of pullback in interest in private markets,
we've found.
And talking to our peers in the venture space, that seems to be unanimous.
And that sort of coincides with the inflation and the rate rises.
So as the interest rates go up, pushes up the discount rate, lowers valuation.
So I think there was a dynamic of people not wanting to catch a falling knife and do new
deals knowing that they could be buying something that's value is lower in any subsequent month
after that for a period of time.
So most investors we spoke to were sitting on their hands, they were having to allocate
any liquid capital they have into re-upping either the main family business where the
initial wealth came from, if that's still an operating business or re-upping into existing
funds that were having to then re-up into their portfolio.
So there was a lot of holding cash for those types of scenarios, which is funny because
we spoke earlier in the conversation about how uncomfortable we were with valuations
for the prior three years around that exact same time, like the start of 2022 calendar
year.
We got really excited about valuations for the first time in a long time and we were
eager to deploy.
And it's one of those sort of fearful when others are greedy situations where we were
seeing the best deals of many years and no one was there doing them.
So I found that very interesting, but I think of recent, like the last couple of months,
I think people are starting to be a bit more confident again, we're seeing deals get done.
Valuations are still modest and attractive in our opinion.
But yeah, it's still the pace is so much slower than the prior three years.
Yeah, look, I was speaking with someone else that pointed out to me that that Christmas
rally which we saw like October, November, the Russell 2000 literally in a month or five
weeks had went from its 52 week low to its 52 week high.
Wow.
Yeah, crazy.
Right after doing nothing like before.
And then the other thing which was quite interesting, which we saw like, you know, just doing a
check over what happened last year is if we completely disregarded what interest rates
did and we literally made our investment decisions on macroeconomics here, based on the Australian
10 year bond rate and the US 10 year bond rate, you pretty much would have called the
market.
I find incredibly interesting about things how things have behaved.
So that's why it's very interesting to hear what you guys are seeing as opportunity currently.
And then what do you think is going to happen 2024?
Pretty excited about 2024 to be honest.
I think a lot of people are thinking about the market as sort of like a fresh slate,
see what happens, see what happens with the interest rate rises if they come through,
how that impact will flow on.
But if we're talking specifically around startups and technology companies and, you know, building
business, I think, as I mentioned earlier, there's been like this return to fundamental
thinking and that's a really good theme for us as investors and I guess anyone as an investor
right now looking at private market opportunities because it's just forcing the discipline back
into the industry that perhaps was lost a lot over the last of the prior 10 years or
prior five years, I should say, when there was just an abundance of capital available
in the market just flowing into these technology companies.
That created a lot of unstructured thinking, a lot of lack of discipline and, you know,
the flow and effects of those things are huge.
And seeing that correct, I think has been a very good experience and I'm quite optimistic
about the opportunities that we're seeing come across the desk already across all the
categories, AI being a big one.
We're seeing a lot of that at the moment.
So I think, yeah, you know, there's no shortage of entrepreneurial talent and technology companies
coming through.
It's more so trying to find some stability and clarity through a lot of the macro uncertainty
and how that unfolds.
Yeah, Dan, so you mentioned AI, it wouldn't be a conversation in this century if we didn't
discuss AI.
So with the deals that you're currently seeing, what's interesting that you're seeing that's
come across the table, are they companies that are legacy that AI has been introduced
to to kind of make them become attractive or are these legitimate problems being solved
by artificial intelligence as a tool to essentially improve the service industry or solve a problem?
You know, it's a good question, Madoc.
We are seeing a lot of, I think, Ron and I sit back and talk about this all the time
because there's a lot of noise in the AI space at the moment.
I think it's something that investors have to be very careful about.
And I mean, we have had many discussions where we think a lot of the AI opportunities that
are out there in the market at the moment are actually uninvestable or not interesting.
And there's a couple of reasons for this.
You touched on a few of them, but I think there's a lot of businesses out there that
are sort of positioning themselves as AI enabled or AI equipped that are actually just to your
earlier thoughts in the podcast that we've been speaking about, like, you know, they
might be services businesses or they might be software businesses that are non-AI that
are bolting on AI functionality.
They may be early stage companies that are positioning themselves as AI, but there's
actually no AI talent in the team.
They don't actually have in-house AI.
They're just leveraging third-party apps.
So you have to be very disciplined, I guess, and specific and do your diligence on most
of the AI that's coming through at the moment to actually validate that one, it is what
it claims to be in terms of there is AI there.
Two, that there's actually people in these companies that understand what the AI is doing
and how it's working and how to create value from that AI.
And three, that there's actually a sufficient or should I say viable business model behind
the AI component of the business that should be monetized or could be monetized.
So these are some of the discussions that Roland and I have when something comes across
the desk, the first thing we'll look at is what's actually here in this business that's
AI and who is building it.
And if you start to do that level of analysis, I think you learn pretty quickly that there
is a lot of noise.
There's a lot of garbage and you do have to be very careful with what you're investing
in.
And to be frank, there's very few businesses out there that have actually proven a viable
business model where the economics are sustainable and make sense, at least from what I've seen.
So I think there's a lot of AI opportunity, a lot of technical interest and entrepreneurial
interest going into the category, but definitely something to be very careful of.
I'm not sure if you had anything to add to that, Roland.
I agree.
I'm sort of an optimist as a consumer in the AI space, but from an investment side of things,
a lot more cautious.
And you can see it in our DealFlow data, just the spike in number of companies that are
using AI in their pitch deck, because we track our DealFlow and we'll tag the software type,
the industry, things like that.
And I don't know if it's half, but it's spiked dramatically that the number of companies
coming in saying they are in some way related or building AI has just gone through the roof.
And you know, it's just not true because we don't have that much AI, genuine AI talent.
So I think there's a lot of noise and that makes us nervous.
So we typically sit back, do a lot of reading, thinking, let others move first when something
is moving this quickly.
Because frankly, I think it's going to be a lot of mistakes.
Whilst we like risk, we don't like making a lot of mistakes.
So yeah, I'll keep playing with Dali and ChatGVT on my own time, but I doubt we'll be doing
it.
Well, the reason why I like using fund managers is, let's be honest, you guys are substantially
more intelligent than I would ever be in a particular topic.
I'm just a jack of all trades, knowledgeable at everything, but not as much as anything.
But what seems to have me dialed in is the social media platforms, what I want.
Usually I must have been talking about contracts to somebody, or like accidentally maybe just
thinking it and they've tapped my thoughts.
But there's this, I can't remember the app that came up and how they pitched it was,
it's an app created by artificial, by AI, which is essentially like the ChatGVT for
legal negotiating contracts.
Give us a contract, say specifically exactly what you want.
And we'll negotiate as hard or as little as possible, our particular things and give you
options.
I was just so excited until I found out, oh, please put your information in here and we'll
send you an update when it's actually about to work.
And I'm like, well, that's great.
I kind of need it today.
So to me, we're seeing AI, software as a service businesses, there are services like that,
that business owners like myself, that is a viable business.
That there is incredibly helpful.
It can get me a running jump on something.
And then just like when you get sick, you Dr. Google, it doesn't mean I'm right, but
at least it gives me the ability to play with something that I couldn't potentially play
before and then take a couple of versions of what I think and then take that to a professional
who has trained for 400 hours, 1,400 years, whatever it is, to get the advice that's appropriate.
Wouldn't you agree that there is a viable, something that sounds interesting.
Is there anything like that?
Fine.
Is that actually a real business?
It's probably just some dodgy marketing thing on Instagram, but have you seen any businesses
like in the legal practices that would be quite attractive in that particular area?
Not in the AI space.
I know some stuff exists.
I may have seen the same thing as you, the negotiating, the chat GPT for negotiating.
I didn't try it though.
I'm always wary of uploading our legal documents into stuff like that until I know who the
company is and what's behind them because they're capturing that data and no one reads
the Ts and Cs.
What do they do with that?
So I've seen them around.
I know the potential for disruption in the legal industry space from AI is huge, which
is wiring a lot of the younger lawyers that I talk to, but haven't seen any in the flesh.
Interesting.
I didn't even think about that.
Obviously the copyright makes a lot of sense, but anything that's just high service.
What we're seeing in financial planning as well, anything that's high amount of legal
work that can essentially take an eight hour task and turn it into two hours and spit
out something that's highly accurate is a great result.
I think you're making a good point, but there are a lot of different use cases where as
a consumer or a business using the AI service is valuable.
I think that there's absolutely no doubt about that.
From an investor standpoint, I guess the conversation that Raul and I often have or always have
is more on the back end of that.
Who's actually providing the technology that provides the value and how is that monetized
and is that what we're investing in versus the as a consumer, do you get benefit from
using this platform?
Those two things, while they seem similar, I guess the difference comes down to who's
building the technology and who's getting the economic value of having deployed it to
the market.
Do they have the right licensing and the right rights to actually be able to monetize that
particular technology and then own the IP behind it as well?
Those kind of questions that we find ourselves asking, there's absolutely no shortage of
really funky tools on the internet now that are powered by AI that actually have very
decent use cases and they can be quite helpful to your point making things more efficient
or even accessible.
I think you're absolutely right.
There's some really cool stuff out there, but in terms of what we're thinking and what
we're doing, we're just keeping a keen eye out there and I guess analyzing everything
that comes across the desk to try and really understand economic value and business models.
Well, thanks Dan.
AI is always quite interesting, but back to the fund itself.
If anyone wants to learn more about this, the second fund, what's the best way they
can find information or is there anything that we haven't discussed that you think they
might need to know?
Look, I think the best way to reach out to us is probably on LinkedIn.
You can reach out to Rowan and I directly.
I'm always pretty active on LinkedIn to make sure that I get back to any other people that
reach out.
In terms of learning more about our fund and what we're working on and I guess our philosophy,
we have a website that you can access at arborcapital.co that talks a little bit about the philosophy
and in terms of what we're working on at the moment, we are still raising that fund.
It is permanent in nature so annually we do open the books and would love to speak to
investors and family officers that really share our philosophy and would be interested
in having a further conversation.
Last question I'd like finishing on is what keeps you up at night and what gets you out
of bed in the morning?
Jeez, you've got me completely unprepared for that and I've got no idea.
What keeps me up at night?
I think at the minute, Rowan and I have been on a journey of building our business over
the last two years and it's been a tough economic environment and just generally a very tough
environment to have discussions about venture capital and raising funds.
I think that's always been challenging but a challenge worth overcoming and pursuing
so we're pushing forward and doing the best we can in the current environment and maybe
I'll pass to you, Rowan.
I think managing other people's money always keeps you up at night I think to some degree.
I'd be worried if it didn't and getting me up in the morning probably literally and figuratively
my three-year-old and two-year-old get me up in the morning earlier than I would like
but it's worth it.
Well, James, it's great to have you on and really appreciate the insights you've given.
I've learned a lot today.
So with that being said, I wish you the best and I look forward to having you on again.
Awesome.
Thanks, Fels.
Thank you.
Thanks, James.
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